e-books: Vertical participation in hub and spoke agreements

The 10 July judgment in the American e-books case (US v Apple) addresses an important question not yet examined under European competition law: what determines the liability of the vertical participant (“B”) in an A-B-C information exchange?

A-B-C information exchange, or hub-and-spoke collusion, involves strategic information such as information about future prices being passed between two or more undertakings operating at the same level of the production/distribution chain (A and C) via a common contractual partner operating at a different level of the production/distribution chain (B). As the European Commission’s Guidelines on Horizontal Cooperation Agreements warn, competition law may be infringed by a disclosure of strategic information “indirectly through a common agency (for example, a trade association) or a third party such as a market research organisation or through the companies’ suppliers or retailers.”

In late 2003 two decisions adopted by the Office of Fair Trading, Replica Kit and Hasbro, found such conduct to have occurred and to be prohibited by the Competition Act 1998. The decisions were upheld both by the Competition Appeal Tribunal (“CAT”) (see here) and by the Court of Appeal (see here).

In December 2012, the CAT’s judgment in Dairy confirmed and clarified a number of uncertainties relating to the liability of parties A and C. It made clear that hub and spoke collusion is a two-phase phenomenon (paras 56-57). In the first phase, the A-B phase, there is a direct exchange of strategic information between A and B. The Court of Appeal in the Replica Kits case had stated that, in the A-B phase, A must:

intend that B will make use of that information to influence market conditions by passing that information to other retailers (of whom C is or may be one).

The CAT’s Dairy judgment shows that the requisite intention can be inferred when the information passed from A to B does not relate to goods or services supplied by or to the particular trading partner (see paras 300 and 368).

In the second phase, the B-C phase, B discloses A’s strategic information in discussions with C. The Court of Appeal had held that C must not only receive strategic information but must also, “in fact, use the information in determining its own future pricing intentions” (Replica Kits para 141). This provides little comfort given the European Court of Justice’s decision in Anic establishing:

a presumption that the undertakings participating in concerting arrangements and remaining active on the market take account of the information exchanged with their competitors when determining their conduct on that market.

The CAT’s Dairy judgment accepted that the Anic presumption is applicable to A-B-C information exchanges. However, the Dairy judgment also provides a rare example of the presumption being rebutted (paras 443-450). The rebuttal illustrates the importance of responding to and reporting inappropriate disclosures of strategic information in a timely manner and making a contemporaneous record of the fact and manner of rejection.

What is unclear in the European jurisprudence to date is whether anything needs to be shown in order that B become party to the anti-competitive agreement, beyond the fact that information is passed on. Some guidance may be drawn from the General Court’s decision in AC-Treuhand. Treuhand, stricto sensu, does not involve hub and spoke collusion since Treuhand was neither a supplier nor a buyer on the market for cartelised goods. However, the judgment is significant to the extent that an undertaking operating at a different level of the market (or not in any related market) is treated as party to a horizontal agreement because:

it intended to contribute through its own conduct to the common objectives pursued by the participants as a whole and was aware of the anticompetitive conduct of the other participants, or could reasonably have foreseen that conduct, and was ready to accept the attendant risk.

Judge Cote’s ruling in US v Apple provides valuable direction specific to the hub and spoke context. Judge Cote found that a number of publishers (A and C) wished to increase the price charged for e-books. She ruled that, for B to be a party to the horizontal agreement, it must be demonstrated that B is “a knowing participant in that agreement and facilitated the scheme” (page 112). Whilst accepting that intention/knowledge is required, Judge Cote rejected the argument that B must possess market power (pages 152-154). Condemnation follows from the factual finding that Apple intended to facilitate a price increase (pages 135-140), and did so by making it known to each publisher that their major competitors would participate in a strategy to increase the price for e-books (pages 31-33, 41, 45, 51, 59-60, 74-75, 80-81, 117-119).

That the judicial authorities require a showing of intention/knowledge on the part of B is particularly interesting in light of two recent economic working papers which argue against such a requirement on the ground that it may lead to under-enforcement of hub-and-spoke collusion (see here and here). It will be interesting to see whether Judge Cote’s approach is upheld on the seemingly inevitable appeal.